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Predicted Bank of England base rate hike could have ‘devastating’ effect on borrowers

Emma Lunn
Written By:
Emma Lunn

The bank’s Monetary Policy Committee (MPC) will announce its latest interest rate decision at 12pm tomorrow (Thursday).

The base rate currently stands at 4.25% after the MPC voted to raise interest rates by 0.25 percentage points last month. This pushed the rate to its highest level since the 2008 financial crisis.

Most experts agree a hike to 4.5% will happen this week, with some pundits predicting a further rate hike in June. Of those experts that expect a rate rise, many disagreed with the MPC’s plan of action.

Graham Cox, founder at SelfEmployedMortgageHub.com, said: “Should the Bank of England raise the base rate? No, as it’s unlikely the effects of the most recent hikes have kicked in yet.

“Will it? Yes, as not doing so when the Fed and ECB have just raised their rates could cause Sterling to weaken against the Dollar and Euro, which is inflationary as imported goods become more expensive. On the other hand, raising rates risks over-tightening and causing huge damage to the economy. Talk about being between a rock and a hard place.”

Putting up interest rates is one course of action the Bank of England can take to try to keep inflation under control. The consumer prices index (CPI) rate of inflation stood at 10.1% in the 12 months to March 2023. This is down from 10.4% in February, but still stubbornly high and far away from the bank’s 2% target.

Ross McMillan, owner and mortgage adviser at Blue Fish Mortgage Solutions, said: “It’s difficult to see how any other outcome other than a rate rise can be expected from the Bank of England each time they meet these days. The headline inflation rate stubbornly refusing to drop by a significant amount does not allow the decisionmakers any leeway.

“The more fundamental question is why those same power bearers continue to believe and utilise such a blunt lever to tackle inflation when all the evidence and data would appear to show little positive impact of recent hikes.”

‘Not welcome news’

Andrew Montlake, managing director at Coreco, said: “The Bank of England will no doubt feel that they have to act to take the base rate higher, but they have a careful path to navigate.

“While the markets look to have priced in another quarter-point rise, the danger is that the bank will once again go that step too far and cause more issues further down the line than they are able to solve now.”

Research by financial advisers Saltus suggest that if Bank of England raises the interest rate again this week, the impact could be devastating. It found that nearly three in four people are already feeling the pressure to keep up with mortgage payments.

Mike Stimpson, partner at Saltus said: “The continued rise in rates will not be welcome news. As our Saltus Wealth Index report reveals that nearly three in four people were already feeling the pressure to keep up with mortgage payments in November 2022 and a further rise will be more gloomy news for homeowners. The findings also showed that nearly 50% of respondents expected interest rate increases will place a strain on cashflow and over 25% were already feeling the impact.”